Prabir De RIS, New Delhi 19 September 2019, New Delhi · Low technology manufactures: textile, garment and footwear 9.42 29.71 38.35 11.90 6.3 Low technology manufactures: other products

Expanding Markets for MSMEs through Trade Facilitation

Prabir De

RIS, New Delhi

19 September 2019, New Delhi

Workshop on Helping SMEs Internationalise through Trade Facilitation

Trade facilitation sine qua non for MSMEs global presence ….….

❑ High transaction costs and time are serious deterrents to trade competitiveness

❑ Easing the burden of trade costs through trade facilitation measures is essential.

❑ One of the key challenges to India’s export is to maintain the competitiveness in the global and regional markets by improving trade facilitation

❑ Trade facilitation help MSMEs to internationalise their goods and services much faster time and lower costs

Market Access Enabling Environment for MEMEs

Financing

Technology

Trade Facilitation

Skilled Resources

E-commerce

Source: OECD (2017)

…….. trade policy strongly influences MSMEs performance

0.2

.4.6

.81

0 10 20 30 40(mean) ex_day_hat

(mean) export_dind Fitted values

Small Firm

0.2

.4.6

.81



Medium Firm

0.2

.4.6

.81



Large FIrm

0.2

.4.6

.81



All Firm

Note: Selected Asia-Pacific countries including IndiaSource: Kumarasamy and Singh (2015)

Lower trade costs motivates MSMEs to take quicker export decisions ……..

0.2

.4.6

.81

0 .2 .4 .6 .8 1(mean) access_formal


Small Firm

0.2

.4.6

.81

0 .2 .4 .6 .8(mean) access_formal


Medium Firm

0.2

.4.6

.81

0 .2 .4 .6 .8(mean) access_formal


Large Firm

0.2

.4.6

.81

0 .2 .4 .6 .8 1(mean) access_formal


All Firms

Note: Selected Asia-Pacific countries including IndiaSource: Kumarasamy and Singh (2015)

…. easier access to finance enables MSMEs in export decisions

MEMEs perception on major barriers to trade between ASEAN and India

•About 30% of the respondents reported that complication in utilizing ASEAN-India FTA is the major concern.•About 25% of the respondents reported that lack of transparency of trade-related rules and regulations are major barriers to trade.

3

10

7

10

25

30

13

2

NTMs such as standards and technicalregulations

Weak physical connectivity

Stringent Rules of Origin

Complicated trade procedures

Lack of transparency of trade-related rules andregulations

Complication in utilizing ASEAN-India FTA

High tariff

Don't KnowSource: AIC

(%)

18 %

4 %

18 %

18 %

11 %

11 %

4 %

7 %

7 %

4 %

0 5 10 15 20

General custom tariffs are low, so an FTA provides noadvantages

There is a reduction or exemption of custom tariffs at theexport destination, so an FTA provides no advantages

Rules of Origin create too many obstacles

Cost of checking and issuing a certificate of origin is high

Procedures for obtaining a certificate of origin arecomplicated

Suppliers do not know the FTA/EPA system and cannotobtain the necessary documentation

Complexity arising because existing FTA/EPA regulationsvary in different Rules of Origin

No FTA/ EPA exists with the export/import destinations

Lack of harmonization of NTMs (especially SPS and TBT)

There are no specific problems

Export and Import Firms

MSMEs experience in utilizing ASEAN-India FTA

Source: AIC

MSMEs making vital contributions to Indian economy

Share of MSME in GVA (%)

Share of MSME in GDP (in %)

2011-12 32.35 30.00

2012-13 32.82 30.40

2013-14 32.71 30.20

2014-15 32.21 29.70

2015-16 32.03 29.20

2016-17 31.83 28.90

31%

36%

33%

0%Size of MSMEs in India

Manufacturing Trade

Other Services Electricity

Source: National Sample Survey (NSS) 73rd round

Source: CSO

32%

35%

33%

0%

Size of Employment

Manufacturing Trade

Other Services Electricity

Total: 111 million

Total: 63.4 million

34

36

38

40

42

2011 2015 2017

%

MSMEs share in India's total exports (%)

Source: Author’s own

90

40

0

20

40

60

80

100

120

Bru

nei

Daru

ssalam

Cam

bo

dia

Ind

on

esia

Laos P

DR

Malaysia

Ph

ilipp

ine

s

Singap

ore

Thailan

d

Vie

tnam

Myan

mar

Ind

ia

Share of Total Enterprises Share of Total Employment

in %

Source: ASEAN Secretariat and Ministry of MSME, GoI

But, Indian MSMEs still behind ASEAN in business

Share of MSMEs in total enterprises and employment in ASEAN and India, 2016*

1995 2018CAGR 1995 -

2018 (%)

Value (US$

Billion)

Share in Total

Exports (%)

Value (US$

Billion)

Share in Total

Exports (%)

Labour-intensive and resource-intensive manufactures 10.35 32.65 47.66

14.79 6.9

Low-skill and technology-intensive manufactures 2.04 6.43 27.75

8.61 12.0

Low technology manufactures: textile, garment and footwear 9.42 29.71 38.35

11.90 6.3

Low technology manufactures: other products 2.34 7.38 32.10

9.96 12.1

Source: UNCTAD Statistics

India’s Exports to World (based on SITC Classification)

MSMEs concentration more in exports of labour-intensive, low-skill & technology

intensive manufactures

MSMEs concentration: labour intensive and low skill and technology intensive sectors

1995 2018

CAGR 1995 -

2018 (%)Value

(US$ Billion)

Share in Total

Exports (%)

Value (US$

Billion)

Share in Total

Exports (%)

Primary commodities, precious stones and non-monetary gold 12.74 40.18 125.16

38.83 10.4

Textile fibres, yarn, fabrics and clothing 8.56 27.00 37.97 11.78 6.7

Dairy products and birds' eggs 0.01 0.04 0.40 0.12 16.0

Processed Animal and vegetable oils and fats 0.04 0.13 0.33 0.10 9.4

Dyeing, tanning and colouring materials 0.36 1.14 3.22 1.00 10.0

Plastics in primary forms 0.06 0.18 4.51 1.40 21.0

Plastics in non-primary forms 0.18 0.58 1.67 0.52 10.1

Leather, leather manufactures 0.47 1.48 1.01 0.31 3.4

Cork and wood manufactures (not furniture) 0.04 0.11 0.35 0.11 10.4

Paper and paper manufactures 0.11 0.35 1.82 0.57 12.9

Total Exports 31.70 322.29 10.6


Traditional Exports of Indian MEMEs:Readymade garments; Leather goodsProcessed foods; Engineering itemsSports goods; Handicrafts

0

5

10

15

20

25

1995 2000 2005 2010 2015 2018

In %

Share in India’s Total Exports to World


0

20

40

60

80

1995 2000 2005 2010 2015 2018

Low-skill and technology-intensive manufactures Medium-skill and technology-intensive manufactures High-skill and technology-intensive manufactures

US$

Bill

ion

India’s Exports to World

India’s Skill and Technology Intensive Exports to World

However, there has been sharp rise in skill and technology intensive exports from India………….

0

20

40

60

80

100

120

140

1995 2000 2005 2010 2015 2018

Low-skill and technology-intensive manufactures

Medium-skill and technology-intensive manufactures

High-skill and technology-intensive manufactures

US$

Bill

ion

Share in India’s Total Imports from World


India’s Imports from World

India’s Skill and Technology Intensive Imports from World

0

5

10

15

20

25

30

1995 2000 2005 2010 2015 2018

In %

…. so also imports of skill and technology intensive goods from the world

WTO TFA helping MEMEs worldwide to raise their global presence

• WTO TFA aims to help MSMEs through:

– Post-clearance audit

– Risk management

– Electronic payments

– Authorized economic operator facilitation

– Single Window

Source: ITC

Three important TF developments in India in recent years

1. Operating (trade) environment has transformed from manual system to electronic system

2. New technologies have helped reducing the trade costs and the rise of digital technologies promises to further transform international trade

3. While India’s achievement in trade facilitation has been quite rapid, country has been facing several challenges those have been arising mostly from the application of new technologies in trade facilitation

But, new challenges in trade transaction affecting MSMEs in India

Elements of Transaction Cost

Port Logistics:1. Cargo Dwell time 2. Rail and road links from hinterland to ports 3. Warehousing facilities (refrigeration)

Customs Procedures 1. Electronic Data Interface (EDI) 2. Signature less, Internet based process for

filing customs related documents. 3. Arbitrary Trust based systems 4. Pre Shipment Inspection Agreements (PSI) 5. Risk analysis and assessment

Standards:1. Domestic Standards setting and

monitoring authorities 2. Lethargic moving towards regional and

global convergence on standards 3. Absence of Mutual Recognitions

Agreements on standards

Trade Information and E-business facilities: 1. Lack of Single Window or Proper channels and

access to market information, legal systems and standards and regulations

2. Absence of availability of information electronically through the internet.

3. Poor E-Business infrastructure mars possibility of business to business contacts

Administrative Red Tapism: 1. Absence of simple and transparent procedures for

export and import 2. Complaints of discriminatory approach to

enforcement based on risk assessment techniques 3. Lack of Public Private cooperation and information

sharing to improve enforcement and compliance

Business Mobility :1. Absence of adequate Financial systems

including Banking, Insurance and Clearance mechanism.

2. Restrictions on movements of Business people/visa restrictionsSource: Prof. Ram Singh, IIFT

India’s border and documentary compliance cost still

0

100

200

300

400

500

600

700

800

India China India China India China India China

Cost to export,border compliance

(US$)

Cost to export,documentary

compliance (US$)

Cost to import,border compliance

(US$)

Cost to import,documentary

compliance (US$)

US$

2014 2015 2016 2017 2018

Source: WDI

India’s border and documentary compliance time exceed that of China’s

0

50

100

150

200

250

300

350

India China India China India China India China

Time to export,border compliance

(hours)

Time to export,documentary

compliance (hours)

Time to import,border compliance

(hours)

Time to import,documentary

compliance (hours)

Ho

urs

2014 2015 2016 2017 2018

Source: WDI

MSMEs benefitted from TF reforms in India

Import Export

• Bill of Lading/Airway Bill

• Commercial Invoice Cum Packing List

• Bill of Entry

• Bill of Lading/Airway Bill

• Commercial Invoice Cum Packing List

• Shipping Bill/Bill of Export

0

5

10

15

20

25

30

35

1991 2001 2011 2018

Export

Import

Documents Need as on 2018 Trends in Documentations

Source: CBICSource: Author’s own

List of documents required to export and import in India

India’s TF reforms and initiatives

• India has enhanced trade process efficiency by implementing several modernised procedures such as SWIFT, Pre-Arrival processing, Direct Port Deliveries (Imports), Direct Port Exit (Exports), Integrated Risk Management, Revamped AEO scheme, Deferred Payment, Reduce paper and rely on digital signatures.

• India has taken renewed and intensive focus on Digital Customs through new investment into IT infrastructure and applications such as Project Saksham.

• India has also taken initiatives for better coordination amongst various stakeholders in the border clearance ecosystem. India has set-up Customs Clearance Facilitation Committees (CCFC) and National Committee on Trade Facilitation (NCTF).

• India has also introduced the Single Window Interface for Facilitating Trade (SWIFT) and E-Sanchit, which have done away with the requirement of physical interface with authorities and expedited the process to a great extent.

• Use of e - Delivery Orders, e- Payments and e- Invoice have been made mandatory since April, 2018 in maritime trade to reduce the documentary compliance time.

• Radio Frequency Identification (RFID) has also been adopted across all major ports to reduce the overall time taken for container movement.

• e-sealing procedure has been introduced to replace the erstwhile practice of supervised sealing by the departmental officers. This has helped in the reduction of time and cost associated with the clearance of export containers.

Digital reforms measures introduced in India

Source: Prof. Ram Singh, IIFT

Ministry of MSME’s export promotion schemes

• Training and Manpower Development

• Participation in the International Exhibitions/ Fairs

• Training Programmes on Packaging for Exports

• Technical & Managerial Consultancy Services

• Marketing Development Assistance Scheme for MSME exporters (MSME-MDA)

• National Award for Quality Products

• We investigate the effect of digital trade facilitation measures on trade costs and its impact on bilateral export

• Methodology: Gravity model framework using cross-section data of 108 countries for the year 2017

Data and Methodology

First Stage: Trade Costs Model

Following Arvis et al (2013) and Dual et al (2018), we have modeled the trade costs (tij)functions including geographical distance (Distij) and cultural and historical distance suchas common language, common colony), regional trade agreements (RTAij), infrastructureindicators like liner shipping connectivity index (LSCIi), quality port index, (QPIi), time toexport, border compliance measures (TEBCi), in addition to implementation of tradefacilitation measures such as digital trade facilitation (paperless and cross-borderpaperless trade) (Digital_TFi) and other trade facilitation implementation indicators liketransparency, institutional arrangements, other custom formalities (NonDigital_TFi ).

Second Stage: Export Model

In the second stage equation, we have estimated impact of trade costs,particularly digital trade facilitation measures on bilateral exports. We haveincluded size of the economy of both reporter and partner countries (GDPij) andthe predicted values of trade costs (tij) that are derived from the first stageequations. Owing to such inclusion, we did not include other gravity variablessuch as geographical distance and cultural and historical distance in the secondstage model. In addition, both Digital_TFi, NonDigital_TFi , Dummy for WTOTrade Facilitation Agreement (WTO_TFAi) and Customs electronic datainterchange (CustomsEDIi) are included in the model

We have included fixed-effect for partner countries to control the cross-country heterogeneity to improve the estimation efficiency. We have also included clustered cross-country pairs in the robust standard errors. Since, controlling for the partner country by including the fixed-effect for partner country; we have only included trade facilitation measures of reporters’ countries in the analysis.

Variable Definition Source

Exportij Bilateral export between country i and country jWITS Database

Tariffij Tariff rate between country i and country j

Distij Weighted Geographical distance between country i and country j

CEPII

Contigij

Dummy variable of contiguity equal to 1 if country i and j share a common border and zero otherwise.

Languageij

Dummy variable of common language equal to 1 if country i and j use the same common official language and zero otherwise.

Colonyij

Dummy variable equal to 1 if country i and j had a common colonizer after 1945 and zero otherwise.

RTAij

Dummy variable equal to 1 if country i and j are members of the same regional trade agreement and zero otherwise.

LSCIij Average scores of liner shipping connectivity index of country i

WDIQPIij Quality Port Index of country i

TEBCij Time to Export, border compliance of country i

GDPij Gross domestic product (current US$) of country i and country j

Digital_TFSum of percentage of cross border paperless trade and paperless trade components

of trade facilitation of country i UN Global Survey on Trade

FacilitationNonDigital_TF

Sum of percentage of transparency, formalities, institutional arrangements and

cooperation of trade facilitation of country i

WTO_TFADummy variable equal to 1 if WTO Trade Facilitation agreement (TFA) signed by

country iWCO

Customs_EDIDummy variable equal to 1 is electronic data interchange in country i to indicate the

Implementation of Single window systemWCO

tij Comprehensive trade costs between country i and country jUN ESCAP Database

Data and sources

Dep.Var.=tijModel 1 Model 2 Model 3 Model 4

Beta Beta Beta Beta

Distanceij0.01*** 0.01*** 0.01*** 0.01***

Colonyij-31.11*** -45.34*** -44.32*** -45.33***

Languageij-26.95*** -28.14*** -25.24*** -28.05***

Contigij-70.69*** -45.34*** -48.27*** -49.47***

RTAij-58.15*** -40.77*** -37.69*** -38.36***

Tariff (ad valorem)ij13.45*** 9.95*** 9.93*** 8.78***

Digital_TFi -1.91*** -1.28*** -1.18***

NonDigital_ TFi0.74** -1.16***

LSCIi -0.11** -0.06*

QPIi-3.38* -6.81***

TEBCi0.17***

constant -5955.2*** -5809.3*** -5848.2*** -5833.3***

Note: The level of significance is indicated as follows: * p<.10, ** p<.05, *** p<.01.

Gravity Model Results:First Stage with Trade Costs Model

Dep.Var.=

LnExportModel 1 Model 2 Model 3 Model 4

Beta Beta Beta Beta

LnGDPij0.72*** 0.66*** 0.58*** 0.58***

LnGDPij3.23*** 3.08*** 3.19*** 3.20***

tij-0.02*** -0.02*** -0.02*** -0.02***

Digital TFi 0.01** 0.01**

WTO_TFi 0.122 0.12

Customs EDIi0.28*** 0.28***

Constant-79.96*** -77.48*** -75.71*** -75.84***

N 6826 4247 4247 4247


Gravity Model Results: Second Stage with the Effect of Trade Costs on Trade Model

Model 1 Model 2 Model 3 Model 4

F value 566.80*** 462.05*** 469.14*** 475.08***

Centered R2 0.79 0.79 0.79 0.79

Uncentered R2 0.97 0.97 0.97 0.97

Anderson Canon. Corr.

LM Statistic for Under

identification test

1294.28*** 793.68*** 786.78*** 792.04***

Cragg-Donal Wald F

Statistic for Weak

Identifications test

373.12*** 149.31*** 166.78*** 136.54***

Sargan Statistic for

over identification test

for all instruments

47.75*** 43. 4*** 57.54*** 65.22***


Diagnostic Tests

Three major findings

1. Predicted trade cost variable shows negative and statistically significant in all the models, indicating higher trade costs significantly reduce bilateral trade.

2. Improvement in trade facilitation measures in the reporting country would facilitate the traders to promote export to the partner countries.

3. Rate of implementation of electronic trade facilitation does promote exports of reporting countries.

Takeaways ❑ India has achieved substantial economic gains by reducing policy-

related non-tariff trade cost, thus facilitating MSMEs exports

❑ India has been successful in introducing a digital customs ecosystem in the country, but need more applications particularly Internet of Things, AI, Blokchain, 3D printing, etc.

❑ Trade facilitation agenda should be harmonisation of documentary requirements, standards, digital interfaces, etc. across the world.

▪ WTO TFA is a good beginning but its implementation rate varies.

❑ There are many areas where India can do better in trade facilitation for MSMEs, particularly in the neighbourhood.

▪ India can introduce a coordinated border management with the neighbouring countries; One Stop Border Post (OSBP) in the neighbourhood; signing of the UN’s paperless trade agreement; tracking of cargoes; performance monitoring; training and capacity building, a.o.

Thank you

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